WASHINGTON -- The fiduciary duty that compels advisers to act in the best interest of clients also subjects them to greater scrutiny from federal regulators in cases involving suspected negligence, SEC officials are cautioning.
Advisers and their attorneys can look to district court rulings, as well as the findings of cases heard before the agency's internal administrative judges. In matters involving advisers and negligence, those proceedings are closely aligned, according to Joseph Brenner, chief counsel at the SEC's Enforcement Division.
"The commission and the courts basically agree that negligence is a failure to exercise the degree of care that a reasonable person or entity would in similar circumstances," Brenner said at the recent SEC Speaks conference.
In the commission's opinions, "what is reasonable depends very much upon the circumstances, and that reasonableness can require a lot more from someone who has a heightened legal duty in a situation like an investment adviser who has a fiduciary duty," Brenner says.
"We see this, I think, pretty clearly in our cases where we're alleging that an investment adviser was negligent because they were aware of something that should have been disclosed but wasn't disclosed. Or where they were doing something that was inconsistent with what their disclosure said," he adds.
Such was the issue in the enforcement action the SEC brought against the Robare Group, a Houston-based advisory firm, in September 2014, involving an undisclosed material conflict of interest stemming from a compensation arrangement with a mutual fund manager.
One line of defense that the advisers advanced highlighted the fact that the Robare Group had engaged outside compliance consultants, and administrative judge initially dismissed the case. But the SEC appealed and ultimately won monetary penalties against the firm and its principals.
"In that situation the commission found that [the outside counsel defense] wasn't enough," Brenner says.
That case underscored the importance of fully disclosing conflicts of interest, one area where the SEC has been focusing its enforcement activity.
Enforcement staffers are not shy about their efforts to bring cases to trial, whether in a federal district court or the commission's internal administrative venue. The SEC's win record in both settings is overwhelming.
"We continue to have a great record in court," says David Gottesman, the division's acting co-chief litigation counsel.
Gottesman describes the commission's "investigate to litigate" initiative, which looks to build cases from the outset of an investigation, compiling court-admissible evidence and involving trial lawyers at earlier stages of the process.
MAKE A DEAL, KEEP A DEAL
Increasingly, the SEC's enforcement unit is pushing the subjects of investigations to cooperate in building cases against other suspects, according to Bridget Fitzpatrick, the division's other acting co-chief litigation counsel.
She cautions, however, that the commission is serious about individuals holding up their end of the bargain.
"If you enter into a cooperation agreement, you've got to be prepared to honor it with us," she says.
For instance, the SEC won a final judgment last year against a former broker who had been charged in an insider trading scheme dating to 2009. Thomas Conradt struck a deal with the SEC, agreeing to help the agency build cases against two of his brokers who he tipped off about an unannounced acquisition, information that they traded on. In exchange, Conradt would face monetary penalties of no more than the roughly $2,500 that he had personally made by trading on the information.
But, Fitzpatrick says, the testimony Conradt gave in his deposition was "very different" from the account that he gave on the witness stand seven months later. He essentially reneged on the deal. The SEC went back to court to argue that in changing his story, Conradt had violated the terms of the agreement, nullifying the deal.
The court agreed, and Conradt was ordered to pay a penalty of more than $980,000.
"The takeaway from that is we're serious about giving people benefits when they really do cooperate fully," Fitzpatrick says. "The second takeaway is that when you don't cooperate fully, you're going to be in just as bad a position as you would have been based on your conduct without having entered into the agreement."
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access